It is in every company’s interest to borrow money for various reasons from all avenues that are available. However, some companies choose to lend money from the city than banks due to some reasons. Today, we will discuss some reasons why a company may prefer to lend money from the city than banks.
Why companies borrow money?
Most firms require cash due to some of these reasons:
To stay ahead of their competitors
The current economic difficulties had propelled many businesses to seek more capital from banks and other sources. This is done to prevent them from bankruptcy.
Increase working capital
Usually, when a company does business on credit terms, their capital outflow may run thin as wholesalers and suppliers demand to be paid before releasing products. When firms are not experiencing rapid development, this could be a problem, as they may not be able to keep up with their performance.
When a firm needs to offer more products and services to different customers across the world, it may need to expand. Expansion needs capital, and not every business can come up with such huge capital without resorting to loans.
Why companies borrow money from the city, rather than banks
There are some reasons some firms prefer borrowing from cities rather than traditional banks, they are
The risk of Foreclosure
Banks usually don’t take ownership of your firm when you borrow money. But, if the contracts drawn up stimulates foreclosure of your business when your default, this will happen. The security of a firm when they take loans is the collateral, however, if the guarantee doesn’t cover the money borrowed, you risk business closure.
Some banks don’t ask for collateral, all they demand is a guarantor that can stand for your loans in case of default. Most firms aren’t too comfortable with this, as the guarantor risk savings are solvency or sometimes jail time. City loans don’t go to such extremes to recover loans.
Bank interest rates are a huge case while many companies ignore bank loans and seek city loans. Bank interest loans aren’t stable, and they could be very high which would make paying back a problem. Aside from interest, the loan terms might also change during the period which will be unfavorable for them.
Benefits of securing loans from the city
With the plethora of problems associated with bank loans, many businesses seek money from the city because
Quick release of funds
Most city councils don’t take time before releasing funds to businesses. This is because they believe these businesses will employ more locals, engage in CSR and other welfare to the immediate community. This makes many businesses approach the city council for loans instead of banks.
Flexible loan term
Unlike banks or other financial institutions, the city will borrow money from a business with an easy payback structure. They usually structure repayment in ways that will be beneficial to both parties.
Little or no default penalties
Borrowing funds from cities guarantee fewer penalties even when you default. When you fail to pay back, they will get in touch with you to know why and if an extension will suffice. Banks don’t offer such luxuries as you will incur late payment fees till you pay up.
Firms have recently preferred approaching the City for loans rather than banks because of the rigid bank’s terms and unfavorable conditions.